11.10 The Concepts Underlying Black Se choles The option price the stock price depend on the same underlying source of uncertainty >We can form a portfolio consisting of the stock and the option which eliminates this source of uncertainty The portfolio is instantaneously riskless and must instantaneously earn the risk-free rate This leads to the Black-Scholes differential equation Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University11.10 Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University The Concepts Underlying Black￾Scholes ➢ The option price & the stock price depend on the same underlying source of uncertainty ➢ We can form a portfolio consisting of the stock and the option which eliminates this source of uncertainty ➢ The portfolio is instantaneously riskless and must instantaneously earn the risk-free rate ➢ This leads to the Black-Scholes differential equation